For the first time ever, on Tuesday, September 18, the Cboe SKEW Index (SKEW) closed above 150 for four straight trading days.
A recent headline in Bloomberg stated a “Surge in Black-Swan Hedging Casts Shadow Over U.S. Stock Rally,” and noted the Cboe SKEW Index near all-time high underscores hedging demand. The story suggested, ”Elevated levels could also reflect lack of demand for calls” ….‘This has everything to do with trade risk in my view,’ said Dennis DeBusschere, the head of portfolio strategy at Evercore ISI.”
SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500® options, generally rise to higher levels as investors become more fearful of a negative equity “black-swan” event — an unexpected event of large magnitude and consequence. www.cboe.com/SKEW
CBOE SKEW INDEX SINCE 1990
The historical data history for the SKEW Index begins in 1990. While the long-term average for the SKEW Index is 119.4, the SKEW Index hit an all-time high of 159.03 on August 13, 2018. The average value of the SKEW Index so far in 2018 is 135.8, higher than in any previous year.
HIGHEST VALUES FOR SKEW INDEX
Prior to 2016 the SKEW Index never topped 150, but since June 2018, the SKEW closed above 150 on 14 dates, including 10 dates since mid-2018 (through September 18).
VOLATILITY SKEW CHART WITH HIGHER IMPLIED VOLS FOR S&P 500 PUT OPTIONS
The volatility skew chart below has implied volatility estimates from Cboe LiveVol for S&P 500 (SPX and SPXW) options at various strike prices (in the x-axis), and for various maturities (see the legend on the left side) at the close on September 18 when the S&P 500 Index (SPX) closed at 2904.31. Note that the implied volatility estimates for many of the out-of-the-money (OTM) put options were in the 20- to 80- range, while the implied volatility estimates for many of the out-of-the-money call options were below 20, much lower. On September 18, the SKEW Index rose to close at a relatively high 151.47, due to the fact that the implied volatilities for the OTM puts were much higher than those of the OTM calls.
MORE ON SKEW INDEX
The value of SKEW increases with the market’s anticipated tail risk of S&P 500 returns. If there were no tail-risk expectations, SKEW would be equal to 100. Cboe’s FAQ on the SKEW Index on Cboe.com notes that –
“The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.”
For more information on skew and use of options for protection and income, please visit www.cboe.com/SKEW and www.cboe.com/benchmarks.